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Term lenders owe each other equal treatment
Bondholders own securities. Two people can hold the same company's bonds without ever meeting, and neither knows who the other is. Term lenders are different: they know each other, and they are party to the same contract. Often an administrative agent collects the money and doles it out, and lenders in the same class have to be treated the same, much like in bankruptcy.
Some credit agreements, Serta's among them, give lenders obligations to each other to do or not do certain things. When the majority of Serta's term lenders made a deal that disadvantaged the minority, the minority sued, and it took six years to reach a judgment. Had the debt been a bond indenture, there might have been no cause of action at all.
Why can bondholders rarely sue each other?
Bonds are issued under a trust indenture, and a trustee acts on behalf of all holders. Most indentures include a no-action clause, which bars an individual holder from suing unless holders of a set percentage of the bonds direct the trustee first. Bondholders also hold securities that can be bought and sold anonymously, so they have no agreement with one another. The contract runs between the issuer and the trustee, not among the holders.
Why do syndicated loans have sharing clauses?
A syndicated loan is built so that many lenders lend to one borrower under one agreement and share in its payments. Sharing clauses grew out of a concern that a lender with an advantage, such as the ability to set off a debt against a borrower's bank account, could be repaid ahead of the others. The clause requires that lender to pass part of the recovery back to the group. That keeps any single lender from getting repaid at the others' expense.
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